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Major Macroeconomic Theories > Short Introductions to Major Theories in Macroe...
Short Introductions to Major Theories in Macroeconomics
• Keynesian Theory
• Monetarist
• Austrian
• Alternative Views
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Major Macroeconomic Theories > Short Introductions to Major Theories in Macroe...
Keynesian Theory
• John Maynard Keynes published a book in 1936 called The General Theory of
Employment, Interest, and Money, laying the groundwork for his legacy of the
Keynesian Theory of Economics.
• Keynes positioned his argument in contrast to this idea, stating that markets are
imperfect and will not always self correct.
• Keynes believed that wage reductions in recessions and excessive savings were
potential threats to an economy.
• Keynesian theory expects fiscal policy to offset business cycles (employ counter-
cyclical strategies).
John Maynard Keynes
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Major Macroeconomic Theories > Short Introductions to Major Theories in Macroe...
Monetarist
• Clark Warburton, in 1945, has been identified as the first thinker to draft an
empirically sound argument in favor of monetarism.This was taken more
mainstream by Milton Friedman in 1956.
• More money in the system results in higher spending and vice verse.This would
theoretically provide some control over aggregate demand.
• Historical implementation of monetarism demonstrated some correlation with
control over inflation rates and increased economic performance.This could have
been a result of other factors however.
• The Austrian school of economic thought perceives monetarism as somewhat
narrow-minded, not effectively taking into account the subjectivity involved in
U.S. Inflation Rates
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valuing capital.
• Due to the globalization of the economy, monetarism may have a negative impact
on external economies.This is particularly true of the U.S., whose capital is an
international standard.
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Major Macroeconomic Theories > Short Introductions to Major Theories in Macroe...
Austrian
• The Austrian school of economics is one of the oldest economic perspectives,
originating in the 19th century in Vienna.
• Austrian economics is attributed for the identification of opportunity cost, capital
and interest, inflation, business cycles and the organizing power of markets.
• Austrian economists do not often place much weight on concepts such as
econometrics, experimental economics, and aggregate macroeconomic
analysis.In this sense, the Austrian school of thought is something of an outsider
relative to other perspectives (i.e. classical, Keynesian, etc.).
• Paul Krugman criticized Austrian economics as lacking explicit models of
analysis, or essentially a lack of clarity in their approach.This results in inadvertent
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blind spots.
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Alternative Views
• The history of different economic schools of thought have consistently generated
evolving theories of economics as new data and new perspectives are taken into
consideration.
• The neoclassical perspective in conjunction with Keynesian ideas is referred to as
the neoclassical synthesis, which is largely considered the 'mainstream' economic
perspective.
• A critical difference between classical and neoclassical perspectives is the
introduction of marginalism.Marginalism notes that economic participants make
decisions based on marginal utility or margins.
• Neo-Keynesian economics is the formalization and coordination of Keynes's
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writings by a number of other economists (most notably John Hicks, Franco
Modigliani and Paul Samuelson).
• The important to understand that these economic perspectives add value to one
another and the overall efficacy of all economic theory.
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Appendix
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Major Macroeconomic Theories
Key terms
• fiscal policy Government policy that attempts to influence the direction of the economy through changes in government
spending or taxes.
• gold standard A monetary system where the value of circulating money is linked to the value of gold.
• Keynesian Of or pertaining to an economic theory based on the ideas of John Maynard Keynes, as put forward in his book The
General Theory of Employment, Interest, and Money.
• Monetarism The doctrine that economic systems are controlled by variations in the supply of money.
• monetary policy The process of controlling the supply of money in an economy, often conducted by central banks.
• Opportunity cost The cost of any activity measured in terms of the value of the next best alternative forgone (that is not
chosen).
• stagflation Inflation accompanied by stagnant growth, unemployment or recession.
• static Unchanging; that cannot or does not change.
• time value of money The time value of money is the principle that a certain currency amount of money today has a different
buying power (value) than the same currency amount of money in the future.
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Major Macroeconomic Theories
U.S. Inflation Rates
The inflation rates over time in the U.S. represent some of the evidence put forward by monetarist economists, stating that governmental control of the
money supply allows for some control over inflation.
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Major Macroeconomic Theories
IS-LM Model
In this figure, the IS (Interest - Saving) curve is shifted outward in a way that raises both interest rates (i) and the 'real' economy (Y).The implication is
that interest rates affect investment levels, and that these investment levels in turn affect the overall economy.
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Major Macroeconomic Theories
Business Cycles
Austrian economists identified the way in which banks issuing credit to institutions who could not generate the equivalent of the interest owed would
eventually create a cyclical economic environment.In short, our credit systems enable or add significantly to the cyclical nature of economics.
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Major Macroeconomic Theories
IS/LM Model
John Hicks generated this model to capture the relationship between investment and savings (IS) compared with liquidity and the money supply
(LM).This particular illustration denotes a shift in the IS curve, raising interest rates (y-axis) and real GDP (x-axis).
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Major Macroeconomic Theories
Phillips Curve
The idea behind the Phillips Curve is that inflation and unemployment will generate correlations.This implies a trade off between inflationary rates and
the creation of employment, which governments could consider in policy making.Stagflation created issues with this however, leading to the development
of New Keynesian ideas.
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Major Macroeconomic Theories
John Maynard Keynes
John Maynard Keynes came to fame after publishing his economic theories during the Great Depression.
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Major Macroeconomic Theories
According to Keynes, fiscal policy should be designed in a way
that is:
A) Cyclical
B) Laissez-Faire
C) As limited as possible
D) Counter-cyclical
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Major Macroeconomic Theories
According to Keynes, fiscal policy should be designed in a way
that is:
A) Cyclical
B) Laissez-Faire
C) As limited as possible
D) Counter-cyclical
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Major Macroeconomic Theories
In Keynesian Economics, it is NOT assumed that:
A) Aggregate demand will be equal to the supply.
B) Aggregate supply will be equal to the demand.
C) Fiscal policy should be counter-cyclical.
D) Excessive saving is a potential economic threat.
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Major Macroeconomic Theories
In Keynesian Economics, it is NOT assumed that:
A) Aggregate demand will be equal to the supply.
B) Aggregate supply will be equal to the demand.
C) Fiscal policy should be counter-cyclical.
D) Excessive saving is a potential economic threat.
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Major Macroeconomic Theories
Who is the first economists credited with identifying empirical
evidence for a monetarist perspective?
A) Friendman
B) Schwartz
C) Warburton
D) Volcker
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Major Macroeconomic Theories
Who is the first economists credited with identifying empirical
evidence for a monetarist perspective?
A) Friendman
B) Schwartz
C) Warburton
D) Volcker
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Major Macroeconomic Theories
Which school of economic thought criticizes monetarism for being
subjective?
A) Classical
B) Neo-Classical
C) Austrian
D) Keynesian
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Major Macroeconomic Theories
Which school of economic thought criticizes monetarism for being
subjective?
A) Classical
B) Neo-Classical
C) Austrian
D) Keynesian
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Major Macroeconomic Theories
The inherent value of the next foregone conclusion in an
economic decision is called:
A) Opportunity Cost
B) The Organizing Power of Markets
C) Business Cycles
D) Interest
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Major Macroeconomic Theories
The inherent value of the next foregone conclusion in an
economic decision is called:
A) Opportunity Cost
B) The Organizing Power of Markets
C) Business Cycles
D) Interest
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Major Macroeconomic Theories
Neoclassic and neo-Keynesian economics are alternative views in
economics which have combined to form:
A) The neo-Keynesian synthesis
B) The Austrian School
C) The Chicago School
D) The neoclassical synthesis
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Major Macroeconomic Theories
Neoclassic and neo-Keynesian economics are alternative views in
economics which have combined to form:
A) The neo-Keynesian synthesis
B) The Austrian School
C) The Chicago School
D) The neoclassical synthesis
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Major Macroeconomic Theories
Attribution
• Wikipedia. "IS/LM model." CC BY-SA 3.0 http://en.wikipedia.org/wiki/IS/LM_model
• Wikipedia. "Keynesian economics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Keynesian_economics
• Wikipedia. "Macroeconomics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Macroeconomics
• Wiktionary. "Keynesian." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Keynesian
• Wiktionary. "monetary policy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/monetary+policy
• Wiktionary. "fiscal policy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/fiscal+policy
• Wikipedia. "Monetarism." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Monetarism
• Wikipedia. "Macroeconomics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Macroeconomics
• Wiktionary. "gold standard." CC BY-SA 3.0 http://en.wiktionary.org/wiki/gold+standard
• Wiktionary. "Monetarism." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Monetarism
• Wikipedia. "Austrian School." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Austrian_School
• Wikipedia. "Macroeconomics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Macroeconomics
• Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time+value+of+money
• Wiktionary. "Opportunity cost." CC BY-SA 3.0 http://en.wiktionary.org/wiki/Opportunity+cost
• Wikipedia. "Chicago school (economics)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Chicago_school_(economics)
• Wikipedia. "New Keynesian." CC BY-SA 3.0 http://en.wikipedia.org/wiki/New_Keynesian
• Wikipedia. "New classical macroeconomics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/New_classical_macroeconomics
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Major Macroeconomic Theories
• Wikipedia. "Macroeconomics." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Macroeconomics
• Wiktionary. "static." CC BY-SA 3.0 http://en.wiktionary.org/wiki/static
• Wiktionary. "stagflation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/stagflation
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